August 1, 2005, 12:00 AM

Photo Finish

The consumer tidal wave of digital camera buying is opening new opportunities to sell digital imaging services—both online and offline

Focusing on its image as a full-service photography retailer has helped make Black Photo Corp. Canada’s largest photo shop chain with 155 locations. “Our claim to fame is that we produce quality photo finishing,” says Phil Chapman, director of imaging and business development for the 75-year-old company.

But like all photography retailers, Black is riding a sea change in its industry, as consumers trade in their film-based cameras for digital versions, lured by the ease of taking, sharing and storing images electronically without having to buy and process film.

A $4 billion market

This year, U.S. consumers will buy about 25 million digital cameras, bringing market penetration to 55%, and then 81% in 2010, according to a report released in June by InfoTrends/CAP Ventures Inc. U.S. consumer purchases of camera phones will reach market penetrations of 31% this year and 81% in 2010, the report says.

Rising digital camera sales, meanwhile, are pushing up revenues from the printing of digital images. Consumers printed 7.8 billion of the 28.5 billion digital photos they took last year, creating a multi-billion-dollar digital printing business. Including prints ordered online, in stores and those made at home, digital photo printing generated about $2.66 billion last year and is expected to reach $3.72 billion by 2010, says Jill Aldort, senior consultant for Internet imaging trends at InfoTrends/CAP Ventures.

To Chapman, the digital revolution is a no-brainer that presents a clear opportunity to engage retail customers in a new range of photography products and services that revolve around the Internet as a distribution vehicle. “It’s bringing incremental store traffic and sales,” he says.

To capitalize on the digital trend, Black Photo and other traditional photography retailers ranging from Wal-Mart Stores Inc. to drug chain Walgreen Co. to single stores are offering their customers the option of loading their digital images onto a web site and ordering prints and photo-engraved items like coffee mugs and T-shirts for in-store pick-up or home delivery, helping to generate traffic to web sites as well as to stores.

“We’re seeing growth of more than 200% year-over-year in revenues and number of images,” says Kyle Hall, executive vice president of PhotoChannel Networks Inc., a Vancouver, B.C.-based provider of digital photo services software to Black Photo and 47 other retailers in the U.S. and Canada, including Eckerd Drugs and Wal-Mart Canada Corp.

Blurry picture

But the digital revolution has its blurry side for retailers, for whom it is both a boom and a potential bust, experts say. While digital cameras and imaging services are causing excitement among consumers, sparking consumer electronics sales for the likes of Wal-Mart and Best Buy Co. Inc. as well as at Black Photo and other specialty photography stores, they’re also offsetting the traditional business of processing and printing film, reducing the number of times photo buffs walk into stores, Chapman says.

So instead of going into a store three times to buy film, drop it off for processing and pick up photographs, consumers may come in only once to pick up prints of digital images loaded online. Another impact, though less clearly defined, is the effect that consumers’ preferences for using, sharing and storing digital images will have on the overall retail photo-printing market itself.

While no one doubts that growth of digital prints will surge over the next several years, consumers are printing a good number of these at home. Almost all, or 94% of digital camera owners who print their images did at least some of that printing at home last year, up from 90% in 2003, and only 13% said they print digital images most often through retailers, according to InfoTrends/CAP Ventures.

The multiple challenges of digital photography can add up to a reduced market share for retail stores, some experts say. “When it was only photographic film, retail stores were 95% of the film processing and printing market,” says Ben Nelson, general manager of HP Snapfish, the online photography service that Hewlett-Packard Co. provides on as well as a third-party service to other retailers. “But in digital photography, retail stores now have about 30% of the market,” the rest going to home-printing and online home-delivery-only services like

Long-term opportunity

Indeed, the move into digital photography presents an uncharted path rife with uncertainties, experts say. “There are a lot of variables at play,” Aldort says.

Although 40% of U.S. households have at least one digital camera, many digital photos never get printed, she notes, and no one knows if some new technology or service will persuade consumers to print more. And then there’s the digital camera phone phenomenon. Although surging in sales, current camera phones operate with low pixel counts that are good for sharing images electronically but not for prints, Aldort says. But now some camera phones are coming out with higher pixels, raising the question if consumers will begin to print images from them, she adds.

Still, there are ample signs that digital photography presents long-term growth opportunities for retailers. Particularly encouraging to retailers is that 33% of consumers who expect to acquire a digital camera this year plan to go to retailers for their printing needs, InfoTrends says.

As a result, prints ordered online for either home-delivery or in-store pick-up are expected to grow, Aldort says, adding that the fastest online market growth is expected for in-store pick-up services. “Online orders for store pick-up are now 5-10% of the total digital photo retail market, but we think it could get to 25% in the next few years,” she says. “Retail digital printing is growing so quickly, that there could eventually be an even split between retail and home printing.”

That growth, of course, will draw in more retailers as digital photography creates a new age of competition. Traditional photography retailers have several options and price ranges for implementing online photo services through companies including LifePics Inc., PhotoChannel Networks Inc., HP Snapfish, Pure Digital Technologies, Fujifilm e-Systems and Silverwire Inc. Online photo centers can range from basic services that let customers upload their images online and order prints for home delivery, to more complex systems that integrate with networks of kiosks, in-store printing labs and third-party providers of imaged-embedded gifts.

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